Private profit vs. public good: A case for repurposing capitalist enterprises

Private business corporations, the central tool of capitalism, need reform. We need to rethink the purpose of the corporation, the principle of limited liability, and the idea of who owns the enterprise

Arun Maira

[At a time when the travails of Jet Airways and Kingfisher’s flamboyant founder Vijay Mallya are in the news, it is worthwhile to remember JRD Tata, who founded India’s flag carrier airline, Air India. JRD Tata said, whenever he had to take a difficult decision, he would consider first what would be in the interest of the country. He concluded that whatever was good for the country would turn out to be good for Tatas too. Photo from tata.com]

Air India, India’s ‘national airline’, is often cited as an example of what ails tax-supported, government-managed, commercial enterprises. One expects lackadaisical service on Air India. I had a ‘moment of truth’ on an Air India flight from Delhi to London recently. It was my fifth international flight in the month. The others were with airlines from other countries celebrated for the quality of their service. I had collected their designer toilet bags stuffed with skincare ointments and perfumes along with eyeshades and earplugs. Air India was not in the same class. I was given only a paper bag with a pair of thin socks and an eyeshade!

In the 1980s, Jan Carlzon turned around Scandinavian Airlines Services (SAS) which became rated as the best airline in the world then. Carlzon evangelised the idea of ‘moments of truth’ to improve the quality of SAS’s customer service. A moment of truth occurs when something clicks in your head, you don’t think as you routinely do, and decide to do something differently. 

A stewardess on the Air India flight noticed my irritation with the poor facilities, including the tacky menu card she handed me. She had her moment of truth. With great grace she went about making me comfortable. Her features were distinctly ‘eastern’, unlike my own more ‘western’ features. She said she had been flying with Air India for 10 years. I thanked her and asked which part of India she came from. Manipur, she said. She said it was a beautiful part of India and urged me to visit. I would, I said and spontaneously added, “People from Manipur are such lovely and gentle people.”

Reflecting on that moment of truth in the air, I felt a surge of pride in my country. Its diversity of people, blending into one nation, united in a collective search for a better future.

The chief stewardess looked distinctly from my part of India, and much older than her colleague from Manipur. I thanked her for her crew’s service. “We do our best with what we have,” she apologised. She had been flying with Air India for 33 years she said. She recalled many moments of ups and downs of the national airline. I told her that my first international flight 52 years ago was on Air India. I was working with Tatas then; JRD Tata was chairman of Air India; he insisted that all Tata employees travel on the national airline.

Today, the daily news in India about airlines is about the travails of Jet Airways, the private airline that emerged with the liberalisation of the Indian economy in the 1990s. It set a new standard of service and was considered the best domestic airline in the world in its early years. Now it is unable to pay its employees and its future is uncertain. Not too long ago, Kingfisher, another private airline, whose flamboyant founder had declared it the ‘king of good times’, went bust, throwing thousands of employees out of work, while its flashy founder escaped to his gilded mansion in London.

Taking a broader view of the benefits companies provide to societies, one may conclude that the private sector is not all good and that the public sector is not all bad. Private financial institutions, who had created a global financial crisis 10 years ago, had to be bailed out with public money. Nevertheless, they propagate the ideology that government is not good and the market is always better and continue to fight against regulations of their industry. The private sector is getting a harder rap now. Global leaders in many industries—automobiles, pharmaceuticals, mining, and technology—are being sued for billions of dollars for unethical conduct and the harm they are doing to societies. Corporate governance is failing, reports The Economist.  

It is worthwhile to go into history to understand how we got to where we are and where we could be headed. Tatas has a remarkably good record of business responsibility for society. JRD Tata said that whenever he had to take a difficult decision, he would consider first what would be in the interest of the country, and then what would be good for Tatas. He concluded that whatever was good for the country would turn out to be good for Tatas too.

From the 1990s, an ideology of shareholder capitalism, founded on Milton Friedman’s dictum that ‘the business of business must be only business’, began to sweep aside the stakeholder capitalism that Tatas embodied. In 2000, the CEO of Tata Steel was asked by an analyst from Wall Street, when the 100-year-old Tata Steel would stop being a ‘socialist enterprise’ and become a genuine capitalist corporation! 

A system of corporate governance seems immoral when it gives to the CEO a golden parachute, while employees suffer

Something is seriously lacking when the concept of good corporate governance is limited to ensuring that corporate boards and managers honour their fiduciary responsibility to investors and to ensure there is equity among investors. Where is the concern for equity in sharing risks and rewards between investors on one hand, many of whom just flit in and out of owning the company’s shares, and, on the other hand, employees, who devote their lives to the company, and communities, from whose resources value is extracted for the benefit of investors? A system of corporate governance seems immoral when it gives to the CEO, who earns 300 times what the average employee does, a golden parachute to bail-out when the company flounders, while employees and communities suffer the consequences.

Can financial investors, who touch companies for only a few seconds, be as loyal to an enterprise as employees?

The rapid financialisation of markets, and the speed with which technology has enabled investors to come in and get out of corporations, has changed the concept of who are the real stakeholders in enterprises. “The average holding time for equity investment has fallen from four years in 1945, to eight months in 2000, and to 22 seconds by 2011 in the US,” Mariana Mazzucato reports in The Value of Everything: Making and Taking in the Global Economy. Can financial investors, who touch companies for only a few seconds, be as loyal to an enterprise as employees who must rely on the enterprise to provide them with incomes for many years?

The limited liability business corporation was invented 400 years ago. It is capitalism’s principal tool for creating economic wealth. The history of the corporation is now at a turning point. Capitalism must confront its own moment of truth. Indeed, a central theme at the recent Global Solutions Summit in conjunction with the T-20 in Berlin, was the urgent need for ‘repurposing’ private business corporations to prevent more harm to societies.

Three structures of the modern capitalist corporation

Three structures of the modern capitalist corporation constrain it from fulfilling a responsible role in society:

  • The narrow purpose of the corporation
  • The principle of limited liability
  • The corporation’s skewed internal construction

Strategies to redirect capitalism to improve the world for everyone, not only capitalists, emerge from an examination of these three structures of the capitalist corporation.

The purpose of the corporation

If the only purpose of the business corporation is to maximise profits for its investors, then, by definition, the owners and managers of the corporation are not required to care about the consequences of their actions on other stakeholders. This view of the firm is consonant with the economics theory that all agents in the economy—human beings as well as firms—are self-interested (and rational) actors. In this view, everyone should look after their own interests and, by the operation of some ‘invisible hand’, everyone’s interests will be looked after. This view perversely requires people to be selfish for the sake of the whole!

The issue with this view is three-fold:

  • This view of human behaviour is not supported by empirical evidence. People care for others, and are willing to sacrifice a lot for their sake. Great social changes have been brought about by people standing up for the rights of others.
  • Since the invention of the limited liability corporation, corporations have become virtual citizens with equal rights as ordinary citizens, along with the special privilege of limited liability that other citizens do not have.
  • They also have greater resources to fight legal battles and to shape public opinion. Thus corporations, who define their purpose as maximising their own profits, have also acquired great power to encroach on the rights of others. This does not bode well for democracy. Concerns are increasing that the unrestrained operation of corporations is corrupting democracy. Most widespread just now is the concern about capitalist corporations who own social media platforms and internet-based businesses, who own masses of data about private citizens, and whose shareholders have become the wealthiest in the world in the last two decades.   

[In March 2019, the European Union levied a new antitrust fine on Google, totalling €1.5 billion. Tech firms like Google and Facebook that have grown rich on the back of citizens’ data, have come under increasing scrutiny in recent times. Photo from pxhere (CC BY 2.0)]

Indeed, when the principle of ‘rational self-interest’ expects wealthy people to set the rules of the game in favour of wealthy people, it will cause inequalities to increase, unless strong counter-acting measures are taken.

In a moral society more responsibility should come with more power. Unless corporations redefine their own purpose and take responsibility for the condition of society and the environment, their freedom to make profits for their own shareholders must be curbed by society and the rules of the game reset.

A different yardstick than profits: Social ventures (and impact investing) are movements emerging voluntarily for creating businesses designed to serve broader societal purposes. There are two distinctions between such ventures and conventional business enterprises.

  1. The product or service they provide must not be harmful. For example, a company that produces tobacco products cannot be considered a socially responsible venture.
  2. Investors in these ventures must be willing to get lower financial returns than they could have obtained from regular business ventures. A company that produces vaccines cannot be considered a social venture if it also expects to produce returns similar to ‘for-profit’ pharmaceutical companies.

These distinctions illuminate the dilemma that public sector banks in India have for example. They were nationalised by Indira Gandhi so that the government could compel them to serve a public purpose by extending banking to poorer sectors of the population. They continue to be directed to serve ‘priority sectors’ such as small and medium enterprises and low-cost housing. Therefore, their business portfolio is less profitable than private banks’ who can choose to avoid sectors that do not provide adequate returns.

However, when the same yardsticks of profits and shareholder value are used to compare public sector banks with private banks, they are found wanting. The distinction between social enterprises and run-of-the-mill business enterprises is lost. Since the principal purpose of enterprises that serve society cannot be to maximise returns for financial investors, the yardsticks of their performance must be the overall impacts they have on society.  

Reporting requirements: Corporations are hard-wired by law to fulfil their fiduciary responsibility to shareholders. They are required to provide detailed, independently audited information to their shareholders. There is no similar legal requirement for them to report the impacts of their operations on the condition of communities and the environment.

A large cottage industry of academics and civil society organisations has grown to persuade corporations to voluntarily report the impacts of their operations on society and the environment. Many reporting formats have been developed by various organisations—GRI, the Equator Principles, Balanced Score-cards, ESG frameworks, etc. They are not having much impact in changing corporate behaviour because

  • their adoption is voluntary, and very few organisations have adopted them.
  • there is no standard, so it is difficult to compare the performances of organisations.

As a first step towards repurposing corporations, companies should be mandated by national laws to regularly report their performance on social and environmental parameters as well. Standard formats must be prescribed. And the media should examine their reports and get to the bottom lines of the impact companies are having on society and the environment.  

Limited liability

Criticism of capitalism is now also coming from within capitalism. Some enlightened capitalists say that capitalism must be saved from its own excesses. Reform of private business corporations, the central tool of capitalism, is essential for reform of capitalism. This will require review of the protection of limited liability that investors in capitalist corporations are provided which shields them from accountability to other stakeholders.

Corporations are fictitious beings granted legal rights of limited liability that real human beings do not have. A radical reform of corporate governance will be to allow limited liability to only those corporations that are explicitly set up to serve a social purpose. This will increase the numbers of public-spirited enterprises.

Limited liability shields investors in capitalist corporations from accountability to other stakeholders

Going there from here, when all corporations, regardless of what their business is, are enjoying limited liability and are able to make private profits at public cost, will be a radical transformation of the corporate landscape. Compulsory disclosure by all corporations of the impacts of their business on society and the environments is a less radical step in that direction.

Reforming the corporation’s internal structure

Capitalism has undoubtedly contributed to increasing the size of the global economy and has lifted hundreds of millions of people out of material poverty in the last century. The remarkable growth of China’s economy has been the principal cause of reduction of poverty in the world after Communist China also adopted many tenets of capitalism. However, many people in the world remain poor. Moreover, inequalities have increased with faster, capitalism-driven economic growth in the last 30 years. 

It is clear that the world needs a better, more equitable, and more sustainable model of growth. The capitalist vehicle in which humanity is progressing must be redesigned. It is putting too much pressure on the Earth’s resources. It is leaving too many people behind.

Ironically, CK Prahalad’s concept of ‘the fortune at the bottom of the pyramid’ also reveals this dichotomy of inequitable growth. Prahalad used the example of how a multinational company repackaged its shampoo into very small sachets, so that people with very little money could afford it. The company’s sales increased. However, the profit was made by the investors in the FMCG company—not the people.

[Providing people with affordable products does not address the root cause of poverty. For that we need enterprises run by the people and owned by the people. Photo by Renzilde (CC BY-SA 3.0)]

The issue is this: who owns the enterprise? The people at the bottom, or people at the top of the economy? Unless people become the owners of their own enterprises, they will not be making any profits from the enterprises. They will not earn wealth. Those who have wealth will make more wealth by investing it in more enterprises to make more profits. Those who have little wealth will be left further behind. Therefore, we need enterprises run by the people and owned by the people if we want to reduce income and wealth disparities.

The concept of a ‘circular economy’ is being promoted these days to manage sustainability. It is a way of mapping and managing all material resources through their life cycle so that nothing is wasted. Another view of a circular economy shows how wealth is generated and flows through the economy.

There are similarities in the structures of the circular material economy and the circular financial economy. In the material economy, solid waste is generated from the production system and it begins to accumulate in some places, choking up rivers and oceans. In the financial economy, financial capital is generated out of the production system and it accumulates in the financial sector.

The size of the financial sector in all economies has grown greatly in the past 30 years. Financial resources from banking are being invested in financial funds—in hedge funds, derivatives, etc. There, they create more financial wealth for investors. They do not go back into the production sector. The size of the financial sector of economies has been increasing with financial investors driving the performance of business enterprises. In the US, from 1960 to 2014, finance’s share of gross value added more than doubled from 3.7% to 8.4%, while manufacturing’s share fell by more than half, from 25% to 12%. At the same time, “Only 15% of the funds generated go to businesses in non-financial industries”, R. Foroohar writes in Makers and Takers (2016).

The shift in the structure of capitalist economies from producer capitalism to financial capitalism is choking up the economic system with the accumulation of a virtual resource, i.e. money, just as the environmental system is getting choked by solid waste.

Businesses for the people, by the people, and of the people

We need innovations in production models that provide more jobs, so that Business is not only for the people but by the people too. However, whereas employees of enterprises owned by others can have incomes, they cannot share in the creation of wealth, the fruits of which go entirely to their capitalist owners. For fuller inclusion in the benefits of growth, innovations are required in enterprise design by which the producers become owners too. Such are Enterprises and Businesses ‘of the people’ too. In this vision, India, a country of over a billion democrats, can also be a country with hundreds of millions of capitalists spread throughout the economic pyramid.

It must be highlighted that such ‘enterprises of the people’ are not state-owned enterprises, which take ownership away from remote shareholders in the financial system and give it to an equally remote state bureaucracy. The workers in these ‘public sector’ enterprises who produce value can be as remote from their governance as workers are in capital-market-owned enterprises, as the crew of the Air India flight illustrated to me in my moments of truth last week.

Examples of genuine enterprises of the people are cooperatives, producer-owned companies, and community-owned and governed enterprises in which the workers and producers create wealth for themselves.

Such forms of enterprises are not new. They operate in many countries, including in India, with examples such as the Amul dairy cooperative, the SEWA group of women’s enterprises, and many other examples of weavers’ and farmers’ cooperatives. This strand of capitalism must be strengthened to make the fabric of capitalism more inclusive.

Reforms of capitalist enterprises

Reforms are necessary to make capitalism more inclusive. Four levers can be used to reform business corporations to make them better citizens of society.

  1. There is need for clarity about the purpose of the enterprise. Is its over-arching purpose to serve society or to produce returns for investors?
  2. We must reconsider whether a corporation should be granted the privilege of limited liability if it is not set up to serve a social purpose.
  3. There should be legal compulsion for all enterprises to report their impacts on society and the environment.
  4. Enterprises should be redesigned to give more power to workers in the governance of the enterprise compared with remote (and fickle) financial investors and to remote bureaucrats in public sector enterprises.

Finally, whether a service should be provided to citizens by the government or by the private sector is a political question and an ideological one too. The private sector pursuing profit is more likely to produce efficiency in the production and delivery of public services. However, while pursuing efficiency it very often creates inequities:

  • inequities in delivery of services by excluding citizens who cannot pay the price of the essential service;
  • and inequity between investors and producers also as was explained before.

On the other hand, state-owned and run enterprises are more likely to ensure equity but are often less efficient.

The pursuit of efficiency and private profit can go too far, and it can encroach on the proper place of the public sector. The handing over of security services, prisons, water utilities, and healthcare services to the private sector in the USA, UK, and other countries infected by the ‘less government, more market’ ideology in the last 30 years is now showing up the deficiencies in the design of private business institutions, especially those listed on stock markets, to provide public services. The reforms of capitalist business institutions proposed here could make private more fit for serving the greater good.

India’s governments must reconsider the role of the private sector in providing healthcare and primary education. Government must improve its own capabilities to deliver such services which are public goods that all citizens are equally entitled to. Should the private sector provide these services it must do it only through enterprises whose purpose is to produce social good and with strict limitations on their own profit expectations. Greedy capitalists seeking opportunities to make profits at the bottom of the pyramid must be kept out. Genuinely ‘social enterprises’, with clear public purposes, with limitations on the returns their investors can get, and with transparency in their accounts to the public of the value they create for society, could be partners with governments in providing some public services.

At last, I return to Air India, with whose story I began. Should an international travel airline be run by the government or by the private sector? International air travel is not yet a basic universal need like public health and primary education are. In my view, India’s earlier ‘socialist’ governments made a mistake in pushing Tatas out of the airline. Tatas had a good record as a socially responsible business enterprise, and also had done a good job to make Air India’s services among the best of the best in the world.

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About the author

Arun Maira
Arun Maira

Former Chairman, BCG India & Member, Planning Commission

Former Member, Planning Commission of India
Former Chairman, Boston Consulting Group, India
Chairman, HelpAge International

Any discussion on policy and the future of India is enriched with Arun Maira’s views, and not just because he was a member of the Planning Commission of India for five years till June 2014. Arun is one of those rare people who have held leadership positions in both, the private as well as the public sector, bringing a unique perspective on how the two can work together to foster growth for India. He has led three rounds of participative and comprehensive scenario building for the future of India: in 1999 (with the Confederation of Indian Industry), 2005 (with the World Economic Forum), and 2011 (with the Planning Commission).

In his career spanning five decades, Arun has led several organisations, including the Boston Consulting Group in India. In the early part of his career, he spent 25 years in the Tata group at various important positions. He was also a member of the Board of Tata Motors (then called TELCO). After leaving the Tatas, Arun joined Arthur D Little Inc (ADL), the international management consultancy, in the US, where he advised companies across sectors and geographies on their growth strategies and handling transformational change.

Another decade later, Arun was back in India, this time as the Chairman of the Boston Consulting Group, a position he held for eight years till 2008. The other leadership positions he has held include being the chairman of Axis Bank Foundation and Save the Children, India. He was also board member of the India Brand Equity Foundation, the Indian Institute of Corporate Affairs, and the UN Global Compact, and WWF India.

Recognising his astute understanding of both macro as well as micro policy issues, Arun has been involved in several government committees and organisations, including the National Innovation Council. He has been on the board of several companies as well as educational institutions and has chaired several national committees of the Confederation of Indian Industries.

In 2009, Arun was appointed as a member of the Planning Commission, which is led by the Prime Minister of India. At this minister-level position, he led the development of strategies for the country on issues relating to industrialisation and urbanisation, and drove the formulation of policies and programmes in these areas. He also advised the Commission on its future role.

With his vast experience and expertise, Arun is indeed a thought leader. He is invited to speak at various forums and has written several books that capture his insights.

His recent books include An Upstart in Government: Journeys of Change and Learning; Redesigning the Aeroplane While Flying: Reforming Institutions (published in May 2014); Remaking India: One Country, One DestinyTransforming Capitalism: Improving the World for Everyone; and Shaping the Future: Aspirational Leadership in India and Beyond.

His book, An Upstart in Government: Journeys of Change and Learning (Rupa), was published in August 2016. The theme of the book is: the progress of nations and organizations has to be a cooperative endeavour. A good society is one that enables each individual to realize his or her aspirations. Everyone must cooperate to create such a society. The book should be of great interest to leaders in government, in the private sector, and in civil society organizations also. For they must all create better cooperation systems within their enterprises and with each other too.

Listening for Well-Being: Conversations with People Not Like Us, was published in 2017. The book is an incisive analysis of the causes for the increasing divisiveness in societies, aggravated by the shallowness of public discourse, and the break-down of communications between people with different beliefs and histories. He suggests ways to reverse these dangerous tendencies and make the world better for everyone.

His latest book is titled Transforming Systems: Why the World Needs a New Ethical Toolkit. In the book, he says, while economies have been growing, systemic problems of social inequality and environmental unsustainability are becoming intolerable. This realisation led to the Sustainable Development Goals, which all countries signed up to achieve. A new toolkit is required to attain these goals that go beyond the precepts of good business management and prevalent best practices in government as well as civil society organisations. This toolkit has to be founded on disciplines of systems thinking, ethical reasoning and deep listening.

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